Masters of credit or hype?
Credit is this year's buzzword in investment banking. Credit analysts, credit trading, credit products and credit spreads are the talk of managers around the world. The excitement is driven by solid economic factors such as European monetary union, improving credit fundamentals, low interest rates and the search for yield. But markets are also being talked up by some traders looking for the upside in bonds almost as if they were equities. Investors are mistaken if they believe that credit derivatives provide a hedge in the same way as interest rate swaps. Will it all end in tears? Peter Lee investigates.
Daiwa Europe took the greenfield approach to the credit business. It recruited 40 staff with varied backgrounds from different firms and built from scratch a kind of credit-processing station. In one end goes a range of assets that are then repackaged and sent out in different forms.
"Whatever asset comes into the Daiwa structured finance group, we always recharacterize the risk, whether through swapping, tranching, enhancing, repackaging. It never leaves in the same shape it came in," says managing director Robin Nydes, who has built the group up since he joined Daiwa from Bankers Trust a year ago.
Using this approach, the bank was able to sell high-risk Russian treasury bills to cautious Japanese investors and repackage Turkey's samurai bonds as Deutschmark Eurobonds taking advantage of different perceptions of Turkish debt in Tokyo and Frankfurt. In a different kind of deal, Daiwa outbid rivals for a UK office complex because it was able to see how securitization - and the role of credit - could release value hidden to equity investors.
None of these deals is exactly rocket science and there are those who feel that the significant characteristic of the new role of credit is hype.